Eurozone crisis returns to spoil US New Year’s party

Posted on 07 January 2012 with 4 comments from readers

The eurozone sovereign debt crisis returned from holiday this week to break up the New Year’s party on Wall Street where several data series encouraged mild euphoria while the real news of the week – debt going above 100 per cent of US GDP – was ignored as an uninvited guest (click here).

But the euro crashed to a fresh low of below $1.27 to the greenback as the crisis knotched up a gear. A $10 billion rights issue for Italy’s largest bank went hopelessly wrong with the bank’s shares losing more in value than the rights issue in a couple of days.

Bad eurozone data

European retail sales for November came in twice as bad as expected and German industrial output plunged by almost five per cent that month.

At the same time the eurozone banks are increasingly closed for business and have become zombie banks reliant on cheap central bank money to stay technically solvent while not lending to customers.

There is $588 billion on deposit with the ECB and a massive $922 billion held on deposit at the Fed by European banks, almost twice as much as a year ago.

The linkage between the drying up of credit in the eurozone banking system and recent falling orders and trade is direct and should be obvious to any economist with the ability to read news reports.

Italian sovereign bond yields are back above the seven per cent level that renders them irredeemable over time, and Spanish debt is closing in on six per cent. Both Portugal and Ireland reached for the panic button above seven per cent.

But Italy is the third largest economy in the eurozone, not part of the periphery. Containing a break down in the Italian banking system is not going to be possible, and the UniCredit rights issue this week showed that confidence is shot to pieces.

US fantasy

US investors who somehow feel detached from this mounting crisis are living in cloud cuckoo land. They are looking backwards at some small improvements gained at huge expense by expanding debt to $15.2 trillion.

Forwards lies the second phase of the global financial crisis that emerged in 2007 and blew up in late 2008. We are much closer to the blowing up part than the start of the slide into this nemesis.

Safe havens are the name of the game this New Year. You still have two days to buy the ArabianMoney newsletter at 2011 prices to get our picks for 2012 (subscribe here).